New revelations about Tesla’s production of the highly anticipated Model 3 sedan should shock, but not surprise, investors.
The Wall Street Journal reported on Friday that Tesla has recently been building major portions of the Model 3 by hand. This comes less than a week after Tesla announced it fell short of its third-quarter production guidance of 1500 cars by more than 80 per cent.
At the time, Tesla attributed the shortfall to “production bottlenecks”. On Friday, Tesla said it would postpone its launch event for a new truck to November to deal with Model 3 issues and provide assistance to Puerto Rico.
Tesla chief executive Elon Musk is known as a risk-taker, which has endeared him to Wall Street analysts and investors alike. There is a fine line, however, between setting aggressive goals and misleading shareholders.
Tesla is inching closer to that line. Tesla was making three Model 3s on an average day in the third quarter. Mr Musk should have known in August, when production guidance was reiterated, that the company wasn’t going to produce 1500 Model 3s by the end of September. There are other examples. At the Model 3 launch event in July, he told reporters that Tesla had received more than 500,000 customer deposits for the car. Five days later, after a series of questions from The Wall Street Journal, Mr Musk revised that number to 455,000 on a conference call with investors. The earlier, higher figure he quoted had been “just a guess”.
Last, but certainly not least, Mr Musk told investors in May last year that he expected Tesla to produce between 100,000 and 200,000 Model 3s in the second half of 2017.
There is far more at stake here than just semantics. Investors have bid Tesla to a nearly $US60 billion ($77.3bn) equity valuation on expectations the company will dominate the car market. That will be a fantasy if Tesla can’t produce enough cars profitably.
Tesla doesn’t have the financial wherewithal for investors to be patient. It burned more than $US1bn of cash in the second quarter and has nearly $US20bn in liabilities on its balance sheet. Tesla’s soaring stock reignited the interest of better-capitalised car rivals in electric cars. Fresh competition is coming.
At 67 times 2019’s expected earnings, Tesla stock is valued as though the company can execute on its vision flawlessly. The facts suggest the opposite.